RUNNING OF THE BULLS

As an MBA business school student in the fall of 1987, in the middle of a raging bull stock market, I was in receipt of a very strong sell signal. In all honesty, I had been for a long time.

Was it from Herby Fischer, my own (and Dad’s) stock broker? (I had a very small account with one holding, Wix, which promptly went down after Herby bought it for me).  No.

Was it from Ira Kawaller, Jimmy Rogers, Jim Freeman, John Whitney or any of the other great business school professors at Columbia Business School? Nope.

How about my pal, Arch Crawford, the famous stock prognosticator who predicted future DJIA index levels by Astrology? Nice try. But wrong.

Ok. Ya think the source could have been someone who had no experience whatsoever in portfolio theory, Elliot wave, or value investing? Someone who never quoted Peter Lynch, Warren Buffet, or even read Alan Abelson’s column in Barron’s?

Yes, it was. None other than the namesake of this blog. My own Dad, Bernard Olcott. Only problem was, he was predicting that the stock market was going to crash. Every. Single. Day. So each evening, I would review the financial news and remark to myself, boy oh boy, that stock market just keeps climbing like gangbusters!

But was it heading for a fall?

“Its credit cards,” he assured me, “dumb bastards keep spending money they don’t have.” The term “dumb bastards” was one he applied to any multitude of idiots. I estimate that most readers of this blog have inadvertently fallen into this category at one time or another without realizing it.  And most assuredly, the writer of this blog.

“Well,” I asked myself, “could he be right?” Was mounting credit card debt a signal that the party was near its end? It was time to do a little research by mining statistics released by the Federal Reserve as reported in the press, including The Economist magazine¹. Assembling a binder full of such data, I presented it to Dad.

It looked just like the chart below for the highlighted time period 1979 – 1987. The bottom black line labelled “Consumer revolving credit” represents credit card debt and the top red line “Total consumer credit” is total consumer debt, with each expressed as a percentage of personal income. Note that credit card debt is a subset, naturally, of total consumer debt.

That total debt amount in this period makes three swings and ends up pretty much where it started, around 18% of personal income. The credit card portion decreases a little, flattens, and then rises two percentage points. However, most of that is matched by a decrease in other types of debt (called “non-revolving” and includes mortgages, car loans, business loans, and so on).

As I wrote above, this data (in the highlighted box; nevermind what came later, which we did not know at the time) matches what I found back in 1987. I showed it to Dad. Credit card debt had climbed, true. It was replacing other types of debt, ok. But overall debt levels were static. There was no evidence that total debt was spiraling out of control.

Naturally, Dad took the contrary view. Credit card debt had doubled! The total amount of debt, he emphatically affirmed, was climbing. (I was relegated once again to the category of “dumb bastard.”  My Federal Reserve figures were wrong!! “Can you show me what your overall debt figures are and where you are getting them from?” I asked confidently. As I learned in school, there is no arguing fact, just go look it up.

However, my request for facts and stats just put me in the crosshairs of a tweetstorm (well, its 1980s version of it anyway). Sometimes, there’s no arguing with folks born in Queens. Must be something in the water. In any event, try as I did, I just could not disabuse Dad of the notion that the rising trend of credit card debt spelled the end of civilization as we knew it.

“Credit card debt!” “Credit card debt!” “The sky is falling!” “The market will crash!”

It was relentless and tiresome. Technically speaking (and leaving aside human timescales) – and just like Chicken Little said – it is axiomatic that market breaks will occur. After all, as J.P. Morgan himself answered, when asked what the stock market values will do, “[markets] will fluctuate.” Indeed!

Periodic price crashes in the equity markets are a fact of life. However, the reality is, if you short the market every single evening in anticipation of falling bottoms the very next morning, you will, in all probability, go broke in short order. And therefore be forced to embark on a career change of some order of magnitude.

In the meantime, at Columbia Business School in 1986 and 1987, I was deep into all manner of business studies, like the Black-Scholes model of pricing derivatives, the LL Bean case in Professor Whitney’s class (where I recommended setting up a flagship store in Alaska, receiving an A for vision and initiative), and even some Human Resources management work (value your human resources!). The latter was clearly alien to anything at Olcott International.

I worked my Wall Street network relentlessly, laying the groundwork for the upcoming recruiting season in my second year. The Number 1 subway train would take me from campus to all permutations of First Morgan Sachs Fifth Avenue offices downtown. As well as in midtown, which was decidedly more chichi.

Aside from Dad’s impending financial crash, there were other hazards to navigate, of course. Once at a Morgan Stanley meet and greet, I was chatting in a small circle, maybe four of us students with a partner. Hors d’oeuvres were passed around, and I absent-mindedly popped one in my mouth. It turned out to be a bacon wrapped morsel of liver. Liver unfortunately makes me wretch and as I bit into it, I recognized the flavor with a sinking sense of despair.

My eyes started watering; my throat tightened; and a gag reflex engaged like a hand grenade popped into your window. I was at risk of projectile vomiting onto the partner. Mind over matter, with some degree of hyper-ventilating, I managed somehow to swallow the offending num-num without splattering anyone. But it was a very close call.

“Credit card debt!” “Credit card debt!” “The sky is falling!” “The market will crash!”

The stock market in the fall of 1987 had just come off their August highs, maybe down 150 points. No cause for concern, right? I was in an optimistic mood, looking forward to a new and happier work experience.

Dow Jones Industrial Average

None of it happened the way either me or my Dad had anticipated.

¹ – Oddly, they call themselves a newspaper.